Gross income is the total amount of financial compensation received by an individual. Taxable income refers to the portion of gross income that is applicable to be taxed under income tax provisions.

There are two main types of income: earned and unearned. Earned income refers to salaries, revenues, or other sources of income that an individual receives in exchange for some good or service. Unearned income refers to canceled debts, government benefits such as unemployment payment, or lottery winnings that an individual doesn’t necessarily have to perform a duty to acquire.

For most individuals the standard tax deduction will be sufficient for their purpose. The standard deduction is a non-itemized deduction meant to simplify the income tax calculation process. However, one common deduction is the charitable contributions deduction. This deduction allows individuals to minimize their taxable income through committing assets to charitable causes.

The way that tax brackets work is income “fills up” a bracket before moving on to the next. Each bracket has its own taxation rate and the income that falls into each bracket is taxed at its bracket’s rate. For example, if one bracket was $0-10,000 at 5% and another bracket was $10,001-$20,000 at 10%, then someone who makes $15,000 would pay 5% income tax on the first $10,000 and 10% on the remaining $5,000.

One of the most common mistakes made when calculating the income tax owed or the return owed to an individual is miscalculation of taxable income. This miscalculation can arise in a number of ways from overestimating the taxable income to incorrectly assessing deductibles owed.